Write-Offs Uncle Sam Wishes You’d Forget
As a homeowner, you can benefit from tax breaks that can shave thousands of dollars off from your IRS bill each year, which could mean a higher refund check. Since it’s that time of year we are all gathering our documents and working on getting out taxes in asap, I wanted to remind you about what owning a home can do to help your tax situation.
And if you currently rent, becoming a homeowner means you’ll get some tax benefits that could make you like filing your tax return.
Read over the list below to see what could pertain to your situation. There are other deductions you might be able to take that I haven’t listed here, so be sure to always consult with your tax advisor. This isn’t tax advice, just a reminder of what to talk to your accountant about!
- Mortgage interest. If your home was purchased before Dec. 16, 2017, for most tax payers, you can deduct the mortgage interest paid on your first $1 million in mortgage debt. For mortgages taken out since that date, most tax payers can deduct the interest on the first $750,000. You’ll want to talk with your accountant about whether it’s better to deduct the mortgage interest or taking the standard deduction instead. The standard deduction is currently $12,400 for single filers and $24,800 for married taxpayers filing jointly. If you decide to deduct the mortgage interest, you’ll need to itemize your income taxes in order to claim this. Don’t just fill out the 1040 without doing the math first to see whether itemizing or the standard deduction will result in the lowest tax bill – or highest refund – for you.
- Property taxes. Property taxes on all real estate are a deductible item, but may be limited. You can only deduct $10k in property/state withholding taxes combined. For example, if you have $24,000 in property taxes, you may be maxed out at $10,000. When you buy a home, check the settlement sheet to see if you reimbursed the seller for property taxes he or she prepaid for a period you actually owned the home. If so, include that amount in your property tax deduction.
- Credit for green improvements. Not a tax break but a credit. It allows homeowners to receive a credit off their federal income tax for making certain qualified improvements that increase the energy efficiency of their homes, such as water heaters, furnace, boiler, heat pump, windows or roofing. The credit amount changes every couple of years.
- Investment Property/Rental Property. The cost of maintaining and marketing a rental property can be deducted from the income the property generates, without regard to the owner’s tax status. Some of the most common expenses include mortgage interest payments, insurance, utilities, maintenance, repairs, advertising costs and management fees, as well as the non-cash cost of depreciation.
- Home office. You can deduct the costs of a home office that you use exclusively as your principal place of business. This is only available to business owners as of tax filing for 2020. Meaning, if you receive a W2, you cannot claim this. This one is notorious for causing audits, so if you are going to claim this one, but sure to talk with your accountant about your situation and whether you qualify.
- Tax-free rental income. If you rent out your own home for 14 or fewer days during the year, the rental income is tax-free.
- Capital Gains: Remember, if you sold your primary residence, then you may not have to pay tax on the gain. The IRS typically allows you to exclude up to $250,000 of capital gains on real estate if you’re single and $500,000 of capital gains on real estate if you’re married and filing jointly. If you are selling an investment property, that’s where it gets a little more complicated, but you could do a 1031 exchange to avoid paying capitol gains on that sale as well.
So, there you have it—the basics of tax benefits for being a homeowner. There are others, so be sure to talk to your accountant. At the very least, take advantage of these.
And, if you don’t have an accountant and want to use one this year, I have several I can recommend. Just reach out to me and I’ll get you in touch! The only question now is, how are you going to spend that big refund check? I’d love to know!
I'm Jordan and I love helping first time home buyers make their first home more affordable and stress-free! It all starts with your personal budget and how much you can comfortably afford. Let me know how I can help you make your real estate dreams come true.
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